Explanation
The fair price for the futures contract should be [1000 x ( 1 + (2%-1%)/2)] = 1005. This means the futures contract is 'rich' at 1020. The trader should therefore short the futures contract, and buy the index spot. To buy the spot index, he will incur a borrowing cost of 2%, which will be partly offset by the dividend yield of 1%, and at the end of six months he will owe a net amount of 1005 and hold the index. At the same time the futures contract would expire too, and he would be able to sell at the agreed price of 1020, making a risk free profit of
15.

Explanation
The security market line is generally shown graphically with returns on the y-axis and the asset's beta on the x-axis. The correct answer is Choice 'a'.
Note the difference between the SML and the CML (the capital markets line). The CML is the transformation line joining the risk free rate on the y-axis and the portfolio with the maximum Sharpe ratio on the efficient frontier, and expresses the relationship between risk and return.

Explanation
The crack spread is the difference between the price of refined products and crude oil. An option on the crack spread can protect a refiner from both a fall in the price of its output and a rise in the price of its inputs.
Calendar spreads are options with different maturities. Crude oil futures and swaps only protect against an adverse change in the price of crude, and not that of refined products. Choice 'b' is the correct answer.

Explanation
The operating free cash flows can be considered a perpetual annuity with a given growth rate.
The value of a perpetuity of a periodic cash flow of 'c', with a discount rate 'r' and growth rate 'g' is given by c/(r - g). In the given case, the company can be considered as providing a perpetual annuity which provides an annual cash flow of $100 which are growing at 2.5% (equal to the GDP's growth rate, as given), and whose cost of capital, or the discount rate to use, is 7.5% Therefore the value of the firm in this case is given by $100/(7.5% - 2.5%) = $2,000. Recall that the value of the firm is equal to the Operating Free Cash Flow/Weighted Average Cost of Capital (OFCF/WACC).
Therefore Choice 'd' is the correct answer.

Explanation
Generally, it is not a good idea to exercise an option early as any more upside in the remaining period to expiry is being sacrificed. However, if an extraordinarily large dividend is coming due, and this dividend is larger than the interest foregone from holding the option, it may be a good idea to exercise the option early. In such cases, the exercise needs to happen before the ex-dividend date and not afterwards. Choice 'b' is therefore the correct answer.
Even if the option is deep in the money and delta is approaching 1, and exercise upon maturity is almost a certainty, it would still always be better to sell the option than exercise it . Therefore Choice 'a' is incorrect.
Choice 'c' is correct in all cases except when a large dividend is coming in. Choice 'd' is not correct because an early exercise needs to happen prior to the ex-dividend date and not afterwards.